FINA chapter 5
A project with a cash flow stream with three changes in sign can have Blank______ internal rate(s) of return.
2 or 3
What is the PI for a project with an initial cash outflow of $50 and a present value of all future cash flows of $150? Multiple choice question. 2
3
What is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years?
9.70% is the IRR for a project with an initial investment of $250 and subsequent cash inflows of $100 per year for 3 years.
An investment opportunity has an initial cash inflow of $75,000 and a cash outflow of $30,000 for the following 3 years. What is the IRR decision rule for this investment if his opportunity cost of capital is 11%?
Accept if IRR < 11%, reject otherwise.
______ cash flows earlier in a project's life are more valuable than Blank______ cash flows later on.
Higher; higher Higher; lower
Jimbo Bobcat has a book deal. He will receive $50,000 in advance to write a book about his life. It will take 2 years to write. In order to write it, he'll have to quit his second job, where he earns $26,000 per year, so his cash flow for each of those 2 years is −$26,000. What is the IRR decision rule for this investment if his opportunity cost of capital is 8%?
In this case, the NPV profile is upward sloping, because he receives his cash inflow before his cash outflows, so the rule is "Accept if IRR < 8%."
You must know the discount rate to compute Blank______, while the discount rate is necessary to apply Blank______.
NPV, IRR
What is the PI for a project with an initial cash outflow of $30 and subsequent cash inflows of $80 in Year 1 and $20 in Year 2 if the discount rate is 12 percent?
PI = $801.12+$201.122$30$801.12+$201.122$30 = 2.91.
A small project has cash flows of −$10 and $45, and a large project has cash flows of −$30 and $70. What is the incremental NPV at a discount rate of 10%?
The answer is the NPV of the difference in cash flows between the two projects. In this case, the time 0 cash flow difference is (−$30−(−$10) = −$20), and the second cash flow difference is $70−$45 = 25. NPV = −$20+ (25/1.10) = $2.73. You can also take the difference in the NPVs of the two projects.
True or false: A project with an initial cash outflow followed by a cash inflow has an NPV that is negatively related to the discount rate.
True
True or false: The MIRR method eliminates multiple IRR problem and it is an alternative to the NPV method.
True
True or false: The crossover rate is the rate at which the NPVs of two projects are equal.
True
The incremental IRR is the rate that causes the incremental cash flows to have Blank______.
a zero NPV
The PI rule for an independent project is to Blank______ the project if the PI is greater than 1.
accept
For a project with a positive initial cash flow followed by negative cash flows, we should Blank______.
accept if the IRR is less than R
A firm evaluating two mutually exclusive projects can ______.
accept one of the projects reject one of the projects reject both projects
If the IRR is greater than the discount rate, we should Blank______.
accept the project
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should Blank______ the project when the IRR is Blank______ than the discount rate.
accept; less reject; greater
Two mutually exclusive projects can be correctly evaluated by Blank______.
comparing the NPVs of the two projects comparing the incremental IRR to the discount rate examining the NPV of the incremental cash flows
A project that results in the firm receiving funds first and pays out funds later should not be accepted.
false
True or false: The scale of a project is never a concern when using IRR.
false
A way to evaluate mutually exclusive projects is to analyze the_________________, cash flows.
incremental
Two mutually exclusive projects can be correctly evaluated by comparing the__________ IRR to the discount rate.
incremental
The net present value of a project's cash flows is divided by the Blank______ to calculate the profitability index.
initial investment
The IRR Blank______ to distinguish between investing or financing.
is unable
The PI rule for an independent project is to decline the project if the PI is Blank______ than 1
less
A project with an initial cash outflow followed by a cash inflow and then a cash outflow Blank______.
may have multiple rates of return
Projects with cash inflow and outflow change over time may have Blank______ IRR(s).
multiple
When cash flows are conventional, NPV is Blank______ if the discount rate is above the IRR.
negative
According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States and Canada?
net present value internal rate of return
When computing the IRR, the discount rate is Blank______.
not needed
In general, NPV is Blank______.
positive for discount rates below the IRR negative for discount rates above the IRR equal to zero when the discount rate equals the IRR
The decision rule for a project for which the first cash flow is an inflow and subsequent cash flows are negative states that we should Blank______ the project when the IRR is Blank______ than the discount rate.
reject; greater accept; less
The incremental IRR is used to account for the problem of Blank______ when evaluating project cash flows.
scale
When evaluating mutually exclusive projects, the profitability index has a problem with Blank______.
scale
The NPV Blank______ the initial investment, while the profitability index Blank______ the initial investment from the present value of all future cash flows.
subtracts, divides
With mutually exclusive projects, the profitability index suffers from the same problem that the IRR rule does in that it fails to consider Blank______.
the size or scale of projects
True or false: Two challenges with the IRR approach when comparing two mutually exclusive projects are scale and cash flow timing.
true
The IRR is Blank______ to account for the scale of the project.
unable